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A forensic audit of a brokerage firm has revealed something unusual. A number of demat accounts opened in a remote area were found to be linked to the same bank account; the know-your-customer (KYC) documentation for opening the demat accounts had been forged.
Eighteen months after a Cobrapost sting had alleged large-scale money laundering in the banking segment, weak anti-money laundering (AML) practices seem to be thriving in the brokerage sector, experts say. “Given the sheer volume of transactions handled on a day-to-day basis, most routed through sub-brokers, the setting up of a robust AML framework, especially from the perspective of client/sub-broker on-boarding and a transaction monitoring system, is the need of the hour. Through recent investigations, we have seen various modus operandi, including forging of KYC documents, resulting in the opening of multiple accounts mapped to the same bank account,” said Vikram Babbar, associate director (fraud investigation & dispute services), EY India.
Money laundering practices are often seen in remote areas, owing to weaker safeguards in these regions, experts say, adding another reason is the prevalence of cash transactions in such areas. Concerns include lapses in risk assessment, in terms of clients’ backgrounds, their income sources and checking details against lists of blacklisted entities. “Often, such issues are coupled with rudimentary transaction-monitoring systems and silo systems that aren’t integrated with each other, leading to layers of manual intervention. In case of the latter, there is also a risk of ineffective segregation of client and propriety funds/securities. Chinese walls between the two are imperative to prevent larger AML issues,” Babbar said.
The Securities and Exchange Board of India (Sebi) has also taken cognisance of these issues. It is said to have initiated the inspection of about 200 members last year for potential violations or discrepancies related to money laundering regulations, following the Cobrapost sting.
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What is the problem? Brokerages lag other financial service sectors in putting in place anti-money laundering systems How do current systems work? Many still rely on manual checks and balances. This opens the way to money laundering, especially beyond the metro cities and in remote areas How widespread is the problem? The large brokers have adequate systems. However, those not in the top rung have weak systems. Sebi conducted 62 special stock broker audits last year to check compliance with anti-money laundering standards. Exchanges and depositories took action in 375 cases |
What are the issues that this causes?
Lapses include checking client details against a database of blacklisted entities. This opens the way to possible terrorism funding
Why is there a delay in implementing better systems?
Stress in the broking sector has resulted in shrinking revenues. Brokers are looking to cut costs wherever they can. Putting in place anti-money laundering systems requires more investments in the business, which they have been reluctant to make
Sebi’s annual report for 2013-14 had said the regulator had carried out 62 special purpose audits of stock brokers to check their compliance with anti-money laundering practices, terror funding through the stock market, and adherence to KYC norms. It added exchanges and depositories had taken action in 375 cases.
Rohit Mahajan, senior director and head, Deloitte Forensic in India, said, “Anti-money laundering practices, not only in the brokerage sector, but also in the broader capital markets space, are still evolving, compared to the progress in some sub-sectors of the financial services space such as the banking sector… While the brokerage/capital markets sector has a lot to learn from other sub-sectors within financial services, greater use of technology and adopting data analytics to ensure effective/ robust continuous monitoring efforts to identify suspicious trends and patterns are steps that should be adopted, given the current environment.”
A senior member of a brokerage association said the increasing costs of compliance, coupled with decreased revenues through the past few years, might make this a difficult exercise. “Brokers are not adequately capitalised and a number of them aren’t making money. While most of the top 10 brokers have systems in place to detect such issues, smaller brokers continue to face resource constraints,” said the person.
